Tight fiscal & loose monetary policies to push India:Nilesh Shah

With the Modi government completing two years in office, Nilesh Shah, MD of Kotak Mahindra Asset Management believes that the Indian economy has performed much better than other emerging countries like Brazil and Russia. "We may not have gone up, but haven't fallen like Brazil and Russia, and that should give us confidence," said Shah. Shah believes that India has chosen a path of fiscal prudence. Whereas the rest of the world is moving towards spending India is moving towards saving. India's fiscal deficit has come down from 4.5 percent to 3.5 percent, and Shah maintained the figure to be 3 percent by next year. A little tight fiscal policy and a little loose monetary policy will give India some leeway in terms of growth, he added. Shah expects the second half of the earnings season to be slightly negative, where PSU banks and metals space will take a hit.  Shah maintained that Indian markets will continue to perform well except in the case of dramatic downturn (globally or domestically). Below is the transcript of Nilesh Shah’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: You were one of those extremely bullish guys. Two years down, do you think we have to temper it with realism? A: Undoubtedly, we have to always temper everything with realism. But the fact remains that today, when I compare India vis-à-vis its peers like Russia and Brazil, they are down 60 percent and 75 percent from where they were standing at par with India. We may not have gone up, but we have not fallen as much as Russia and that itself should give us confidence. Sonia: So, India has not fallen as much as the other peers. That point is taken, but what could the growth from here look like? Between 2014 and 2016, the growth in the Modi government’s tenure has not even been 10 percent. Going ahead, over the next 1-2 years, do you see the outperformance continue or that the Indian market has seen vis-à-vis its other peers? A: My guess is that today, we have chosen the path of fiscal prudence. From the economy and market point of view, part of fiscal prudence is one good thing which can cover many of the limitations, be it Brazil, be it Russia, be it China, the world is moving towards spending. We are moving towards saving. Our fiscal deficit has come down 4.5 percent all the way up to 3.5 percent and on the way to become 3 percent next year. So, part of fiscal prudence is something which eventually should benefit us in terms of growth. More importantly, last three years, we have run a tighter monetary policy to control inflation. And now, RBI, on April 5, credit policy talked about bringing liquidity neutral. This is a significant change. We earlier had a scenario where fiscal was a little bit loose, monetary was a little bit tight. Now, fiscal is a little bit neutral and monetary is becoming a loose. This combination should give us greater leeway in terms of growth. Latha: Actually, you also said that in comparison to other markets, we are looking good. This ‘andho mein kana raja’ is what everybody is telling us, that is what Atul Suri also said, but the governor got quite a bit of bashing for that. A: I prefer oasis in a desert. That is a better way to say it. Latha: Oasis? Not in this weather. Anyway, how do you assess the earnings picture so far? So far it has been good, but the monsters always come out in the second half of the earnings season. Anticipating that, Bank of Baroda will give you an idea of what to expect from SBI and such like. Anticipating the entire earnings season, how would you rate it? Is this the final backwater? Will it still have less downgrades than we have had in the past? A: You correctly mentioned that second half is always in the inferior or poor quality results. We are going to see negative surprises from public sector undertaking (PSU) banks, from commodity companies like metal and oil. The good results which have come so far have been in private sector banks, rural related sectors, some fast-moving consumer goods (FMCG) companies despite Patanjali, many of the technology companies and pharmaceutical companies. Some of the local economy related companies, be it in home improvements and so on and so forth have also delivered fantastic results. If we see the top companies, top-200 companies results, adjusted for commodities and PSU Bank. The profitability growth is almost 17 percent plus. So, my guess is that we are probably going to see an overall Q4 season, notwithstanding the bad results which are now going to come in hit us, it will be overall a season which is a little bit above expectation of market, though it will be significantly lower when we began the year FY16. We were expecting 15-16 percent earnings growth. Now, probably the numbers are coming at 2-3 percent. What is more important is FY17 earnings trajectory where after two years of drought, monsoon could be supportive for economy. After almost 3-4 years of tight monetary policy, we could see liquidity coming back into this system, we could see overall interest rates being transmitted to the borrowers, and hopefully, we will see some recovery in exports. So, combination of all these things, definitely puts FY17 and Fy18 earnings trajectory on a far better path than FY15 and FY16. Sonia: Every time you join us for the investor camp, you make some very interesting comparisons between if one had bought the stock or one had used to companies products. And I will never forget when you told us about Asian Paints. You told us that if 15 years back, you had bought the Asian Paints stock rather than painted your house, today you could have bought a new house. We have seen stellar numbers from Asian Paints, time and time again, but now do you think it is too late to get into this stock or is there still a lot more potential for some of these consumption names like Asian Paints? A: We cannot give stock specific comments, but I always mentioned that you should paint your house so that Asian Paints sales keeps on increasing. And to hedge that, you should also buy the stock. So do not avoid painting the house, otherwise Asian Paints can never do well. But the point is that today, we are at a stage where we are just about a USD 2 trillion economy and between optimistic and pessimistic assessment, if we do an average, we could be doubling our economy over next 10, 12, probably 15 years. Now, that does not look like a tall task because in the last 10 years, we have to build our economy from USD 700 billion to USD 2 trillion. Even with a larger base, we should be able to double it anywhere between 10 and 15 years. And if over the last 25 years, we have created so many blue chip companies which have returned so much to the investors, I do not see a reason why over the next 10-12 years, the same cycle cannot be repeated. Latha: What kind of a downside can you see for this market? Is the Budget day downside still a reality? In 2016 I mean. I am not asking you for a very long horizon. Is that possible or is it that definitely, we have put a bottom much higher than that? As well, what kind of highs, ultimately, you may call us an oasis, but for someone who entered one year ago, this is no oasis, this is still a desert as far as the stock investor is concerned. So, what kind of gains can this market give in 2016? A: It is always difficult to predict what will happen in the next six months or next seven months. But clearly, based on today’s variables, we do see markets have definitely made the bottom at the Budget loss. Unless and until something dramatic happens, we are unlikely to see those kinds of losses in the market. Market has priced in a good monsoon. Any disappointment over there definitely will be a negative factor. Some of the global events like Britain exit, it will not have material impact on our economy, but it will have quite a big impact on our sentiment and who know how people will react to that. Fed increasing its rate increase space beyond what is priced by the markets would again create a temporary hiccup for us. So, unless and until an event risk happens which is not priced in by the market, I do not foresee markets going to the February lows. At the same time, where will the upside of the market will be, it is a function of how the economy phases out. We need better liquidity which is promised by RBI. We need better transmission of rates which is promised by RBI. We need good monsoon what is predicted by India Meteorological Department (IMD). We need government to follow the path of fiscal prudence, but at the same time spend on roads and railways announced in the Budget. And eventually, we need some amount of export recovery. A combination of this can surprise the investors on the upside in the market.